Enlightenment Through Understanding

Trump tax cuts & deficits: not worried about inflation

The economy growing steadily, yes, but 3% GDP growth is not exactly soaring. But if 538 wants to help Trump win in 2020 by hyping the economy, let them. As the saying goes, never interrupt your enemy when he is making a mistake.

The fear is that due to deficit spending combined with strong economic growth, the economy may overheat and hence lead to high inflation and other problems.

But I’m not worried, and odds are we’ve reached ‘peak inflation’.

When Trump won, the odds of tax cuts instantly jumped from 10% (the odds of Trump winning) to about 100%. This may have caused companies to change their forecasts and spending as if the tax cuts had already happened, possibly providing a small economic boost despite the tax cuts having not yet happened. Same same for stimulus spending, but the odds on of that are less certain (maybe 50%). So that is why, a year after Trump’s win, we’re seeing slightly higher economic growth and inflation despite the tax cuts only being signed into law a month ago. What is more likely to happen now is that there will not be high inflation despite the high deficits. I remember reading the same arguments in the 2000′s about how the Bush tax cuts would cause high inflation, but the inflation never came. The reason is because tax cuts + stimulus cannot be both ineffective and inflationary. The consensus by many economists seems to be that tax cuts and stimulus only provide at most a modest economic boost (which we’ve already seen), if any. This means that interest rates won’t have to rise much, but longer-dated bonds may suffer.